The good news of corporate earnings for the fourth quarter of 2019 exceeding forecasts was overshadowed by concerns over the impact of the coronavirus on future earnings. Estimates of first quarter earnings growth have been slashed approximately in half so far with tremendous uncertainty in even those guesstimates. Fridays have been particularly challenging in 2020 with an average daily decline of -0.52%, as traders have been nervous about weekend developments concerning the spread of the disease. This past Friday the news of the first victim in Japan to die from the Virus triggered a steep decline in global equities, leaving the S&P 500 down 1.2% for the week. U.S Treasuries were the safe haven once again, with the yield on the Ten-Year dropping 12 basis points to a five-month low of 1.47%. The yield on the Thirty-Year reached its lowest all-time level. The bond market is foreshadowing a prolonged economic slowdown, while the stock market is forecasting a brighter outlook. The forward 12-month P/E ratio of 18.9 is above the four most recent historical averages for the S&P 500: five-year (16.7), 10-year (14.9), 15-year (14.6), and 20-year (15.5). In fact, it is the highest foreword P/E since May 23, 2002 (19.1). However, it is still well below the peak P/E ratio (of the past 20 years) of 24.4 recorded on March 24, 2000. At the sector level, nine sectors had forward 12-month P/E ratios on February 19 that exceeded their 20-year averages, led by the Utilities (21.4 vs. 14.5). The virtuous(?) circle for equities is that any evidence of economic headwinds immediately pushes interest rates lower and fosters stimulative global fiscal and monetary policies. The confidence in the continuation of that circle is the cornerstone of the high P/E ratios that have driven the S&P 500 to record levels. A surge in inflation could certainly disrupt the circle, and it’s worth noting that total PPI rose 2.1% last month, up sharply and unexpectedly from December and at the fastest pace since April. Economists surveyed by Bloomberg expected a 1.6% increase.
Earnings season winds down with 43 S&P 500 companies scheduled to report results for the fourth quarter.
The coronavirus will likely dominate the headlines and influence the markets. Over the weekend the spread of the virus continued to spread outside of China, with Korea, Japan, Iran, and Italy all reporting spikes in cases. Global equity shares plunged in response Monday morning.
The economic calendar is quite busy, with consumer confidence, personal income and spending, as well as the Fed’s favorite inflation measure (Core PCE prices) all to be reported on Friday.
Stocks on the Move:
VIAC -19.2%: ViacomCBS, Inc. is a leading global media and entertainment company that creates premium content and experiences for audiences worldwide. Driven by iconic consumer brands, its portfolio includes CBS, Showtime Networks, Paramount Pictures, Nickelodeon, MTV, Comedy Central, BET, CBS All Access, Pluto TV and Simon & Schuster, among others. The company delivers the largest share of the U.S. television audience and boasts one of the industry’s most important and extensive libraries of TV and film titles. The Company reported fourth quarter results and provided a strategic update that fell far short of Wall Street analysts’ expectations. Bob Bakish, President and CEO commented “In less than three months since completing our merger, we have made significant progress integrating and transforming ViacomCBS. We see incredible opportunity to realize the full power of our position as one of the largest content producers and providers in the world.” He continued “This is an exciting and valuable place to be at a time when demand for content has never been higher, and we will use our strength across genres, formats, demos and geographies to serve the largest addressable audience, on our own platforms and others. In 2020, our priorities are maximizing the power of our content, unlocking more value from our biggest revenue lines and accelerating our momentum in streaming. With this as a backdrop, we’ve set clear targets for the year and are providing increased transparency around our business to demonstrate ViacomCBS’ ability to create shareholder value today, as we continue evolving and growing our business for tomorrow.” Wall Street wasn’t buying what the Company was selling, as there was a wave of price target reductions to an average of $43.39, which is 53.3% higher than where the share price closed at after the carnage. VIAC corporate bonds are a 1.22% holding in the North Star Bond Fund.
FLWS +10.7%: 1-800-FLOWERS.COM, Inc. is a leading provider of gifts designed to help customers express, connect and celebrate. The Company’s Celebrations Ecosystem features an all-star family of brands, including: 1-800-Flowers.com®, 1-800-Baskets.com®, Cheryl’s Cookies®, Harry & David®, Shari’s Berries®, FruitBouquets.com®, Moose Munch®, The Popcorn Factory®, Wolferman’s Bakery℠, Personalization Universe®, Simply Chocolate®, and Goodsey®. The Company announced the signing of a definitive agreement to acquire PersonalizationMall.com, a leading online retailer of personalized products that offers thousands of products available with a broad range of innovative personalization options. Chris McCann, CEO, said, “PersonalizationMall’s extensive product offering and industry-leading personalization capabilities will be an excellent addition to our growing family of popular gifting brands. The broad assortment of customizable products and processes that have made PersonalizationMall.com a premier provider of keepsake items will help us further our company’s vision to inspire more human expression, connection and celebration while enhancing our position as the leading one-stop destination for all our customers’ celebratory and gifting occasions.” PersonalizationMall.com has achieved steady financial growth for the past several years, with revenues reaching more than $150 million in its most recent year. “We expect PersonalizationMall.com to be accretive to our top and bottom-line results in fiscal 2021,” McCann said. FLWS is a 4.59% holding in the North Star Micro Cap Fund.
LAKE +10.6%: Lakeland Industries, Inc. manufactures and sells safety garments and accessories for industrial protective clothing market. It offers limited use / disposable protective clothing, chemical protective suits, and firefighting and heat protective apparel. In past epidemics Lakeland’s business has performed well, as there has been an increase in demand for their protective garments. LAKE is a 2.66% holding in the North Star Micro Cap Fund.
OESX -12.2%: Orion Energy Systems, Inc. is a provider of LED lighting and turnkey energy project solutions designed to reduce energy consumption and enhance business performance and efficiency. Orion designs, manufactures, markets and manages the installation and maintenance of LED solid-state lighting systems, along with integrated smart controls. Orion systems utilize patented design elements to deliver industry-leading energy efficiency, enhanced optical and thermal performance and ease of installation, providing long-term financial, environmental, and work-space benefits to a diverse customer base, including nearly 40% of the Fortune 500. Profit-taking is the most likely explanation for the share price decline, as even after the drop the stock is up over 400% in the last 12 months. OESX is a 4.27% holding in the North Star Micro Cap Fund and a 5.05% holding in the North Star Opportunity Fund.
SP -12.4%: SP Plus Corporation is a leading provider of technology-driven mobility solutions for aviation, commercial, hospitality and institutional clients throughout North America. The Company reported earnings per share were $8.8 million and $0.41, respectively, in the fourth quarter of 2019 as compared to $9.1 million and $0.40 per share, respectively, in the same period of 2018. G. Marc Baumann, Chief Executive Officer, stated, “Fourth quarter operating results represented a strong finish to an excellent year for SP+. We’ve successfully integrated the Bags acquisition, which we see as transformational in terms of the long-term growth opportunities. Additionally, our team executed well on key business development initiatives, including building out our national accounts and group purchasing organization relationships, and leveraging our position in key high potential verticals. In 2019, Bags continued to benefit from first-mover advantage in the nascent Remote Airline Check-In (RAC) market, establishing its remote check-in services for passengers traveling on major airlines, most recently at Boston’s Logan International Airport. He continued, “Reported and adjusted earnings per diluted share for full-year 2019 came in at or above the high end of our guidance range and free cash flow outpaced our guidance thanks to our strong operating performance coupled with working capital improvements. Strong free cash flow was used to return value to stockholders in the form of repurchases totaling $48 million during 2019.” SP is a 2.95% holding in the North Star Micro Cap Fund.
NCMI +21.2%: National CineMedia, Inc. is the managing member and owner of 48.8% of National CineMedia, LLC (NCM LLC), the operator of the largest cinema advertising network reaching movie audiences in North America. The Company announced that revenue for the fourth quarter ended December 26, 2019 increased 7.1% to $147.2 million resulting in a record quarter for advertising revenue as compared to $137.4 million for the comparable quarter last year. Operating income increased 19.6% to $72.7 million for the fourth quarter of 2019 from $60.8 million for the fourth quarter of 2018. Net income for the fourth quarter of 2019 was $19.1 million, or $0.24 per diluted share, compared to net income of $16.3 million, or $0.21 per diluted share, for the fourth quarter of 2018. Commenting on the Company’s 2019 operating results and 2020 positioning, NCM CEO Tom Lesinski said, “I am very happy to report that we finished 2019 on a strong note, posting records for fourth quarter advertising revenue and for full-year National advertising revenue. This top-line revenue growth resulted in better than expected Adjusted OIBDA growth for both the current quarter and the full year and this momentum is continuing into 2020. Our Board of Directors also shares our optimism on the growth we see ahead. I am pleased to announce the board has authorized a 12% increase in the Company’s regular quarterly cash dividend from $0.17 to $0.19 per share of common stock bringing the dividend to $0.76 per share on an annualized basis.” NCMI is a 2.48% holding in the North Star Dividend Fund, a 2.49% holding in the North Star Opportunity Fund and NCMI Corporate Bonds are a 2.48% holding in the North Star Bond Fund.